2012 (8) TMI 308 - HC - Income Tax

Employee-directors entitled to bonus and commission payments under Income Tax Act Section 36(1)(ii)

The Court upheld the decision of the Appellate Commissioner and the Tribunal in favor of the assessee, allowing the payment of bonus and commission to ... Disallowance of Commission & bonus paid to Directors - Held that:- Being a closely-held family company which had by resolution authorized payment of commission to working directors - as no commission was paid to some directors which indicated that such category of amounts was not distributed to directors according to the company’s shareholding pattern & receivers of commission had a very small shareholding in the company - as no reason to doubt that what was paid to these working directors was indeed commission falling within the first part of Section 36 (1)(ii) - no substantial question of law. Issues:1. Disallowance of commission and ex gratia amount by Assessing Officer.2. Appeal against the order of the Appellate Commissioner.3. Tribunal's confirmation of the Appellate Commissioner's reasoning.4. Variation in facts regarding dividend payment to shareholders.5. Interpretation of Section 36(1)(ii) of the Income Tax Act.6. Shareholding pattern of the closely-held family company.Analysis:1. The case revolved around the disallowance of commission and ex gratia amount by the Assessing Officer during the assessment year 2008-2009. The Assessing Officer added these amounts back to the taxable income under section 36(1)(ii) of the Income Tax Act. However, the Commissioner (Appeals) allowed the appeal filed by the assessee, noting a similar decision for the previous assessment year where such disallowance was directed to be deleted.2. The revenue challenged the decision of the Appellate Commissioner by filing an appeal before the Income Tax Appellate Tribunal. The Tribunal, in its order, upheld the reasoning of the Appellate Commissioner and relied on a previous decision of the High Court which had rejected the revenue's appeal. The Tribunal emphasized the consistency in allowing payment of bonus and commission to employee-directors under Section 36(1)(ii) of the Income Tax Act.3. The revenue contended that there was a variation in facts in the current case as compared to previous periods, highlighting the absence of dividend payment to shareholders. The revenue argued that this variation justified the disallowance made by the Assessing Officer. However, the Court carefully considered these submissions and found that the Tribunal's order was detailed, taking into account the peculiar shareholding pattern of the closely-held family company.4. The Court noted that the company, being closely-held with a family shareholding pattern, had authorized payment of commission to working directors. The Tribunal observed that some directors did not receive any commission, indicating a deviation from the company's shareholding pattern. Additionally, the directors who did receive commission had minimal shareholding in the company. Therefore, the Tribunal concluded that the amounts paid to these directors constituted commission under Section 36(1)(ii) of the Act and could be claimed by the assessee as such.5. After considering all arguments and the Tribunal's reasoning, the Court found no substantial question of law warranting consideration. Consequently, the appeal was rejected, affirming the Tribunal's decision in favor of the assessee.